Diversification, both geographical and product, has helped Mahindra & Mahindra beat the demand slowdown. Even as the company has witnessed a decline in its auto sales in the first quarter, a robust growth in tractor sales has helped prop up sales and profit. Over the last few years, the company’s two divisions (automotive and farm equipment) have shown disparate sales growth. So even as tractor sales declined by five% in FY13, in the first quarter, tractor volumes have grown 25% year-on-year to 75,577 units. On the other hand, automobile volumes are down 2.4% year-on-year to 122,985 units.
Strong demand for tractors has also helped M&M maintain its operating margin at 12.8% even though overall realisations have declined by four% sequentially. The company’s operating margins for the standalone business improved 120 basis points year-on-year and 70 basis points quarter-on-quarter to 12.8%. A stronger operating margin coupled with a sharp rise in other income helped the company beat the Street’s estimates on post-tax profit.
Lower commodity prices, strong margins and higher other income offset the relatively slower growth in sales. Even though revenues grew seven% to Rs 10,020 crore, adjusted net profit rose 29% YoY to Rs 940 crore. The raw material to sales ratio declined 190 basis points sequentially to 73%. Yaresh Kothari of Angel Broking expects tractor sales to grow by 12% during FY14 and this would help offset the slowdown in the automotive segment. The operating margin is expected to rise from last year’s 11.6% to 12% in FY14. However, if the company manages to maintain blended margins at 12.8%, as seen in the first quarter, the stock could see earnings upgrades.
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Despite the slowdown, M&M is among the few companies to expand EBIT margins in both the farm-equipment segment and automotive segment. EBIT margin for the tractor segment grew 100 basis points year-on-year to 16.7% during the quarter. For the automotive segment EBIT margins during the quarter rose 50 basis points year-on-year to 9.3%. Analysts say that both have come in above estimates.
Even though the first quarter numbers are ahead of estimates, the overall slowdown is a cause of concern. M&M is expected to end the fiscal with flat automobile sales and a 12-14% growth in tractor volumes. While this would support earnings growth, any variation from these estimates would result in earnings revision. Emkay Global believes M&M is a relative pick among the domestic original equipment manufacturers and expects the stock to remain range-bound with little limited downside.